Economics focus

Dancing elephants

Is Indian capitalism becoming oligarchic?

MANY Indians take justifiable pride in the rise of “India Inc”. Since winning independence from the licence and permit Raj 20 years ago, Indian companies have grown in size and scope, venturing into overseas markets and snapping up foreign companies. But even as Indians celebrate the rise of their country's companies, they fret about the longer shadows those firms now cast. They worry that India's corporate titans are too firmly entrenched, and too deeply ensconced in the corridors of power.

In the telephone conversations of a corporate lobbyist, tapped by the tax authorities and leaked to the media, Indians have heard ministries described as ATM machines and the ruling party referred to as “our shop”. They have read reports of companies wildly overcharging the government for the Commonwealth games and underpaying for mobile-telephone spectrum. The fear is that Indian capitalism is turning oligarchic.

Oligarchs begin as oligopolists: market power and political power tend to go hand-in-hand. Many people assume that 20 years of liberalisation has largely stripped India's corporate establishment of its market muscle. But a 2009 paper* by Laura Alfaro of Harvard Business School and Anusha Chari of the University of North Carolina at Chapel Hill documented an economy still surprisingly dominated by incumbents. The authors drew on a database kept by the Centre for Monitoring the Indian Economy, which covers every firm that files financial statements.

As the economy opened up, the database recorded the birth of thousands of new, private firms. By 2005 it contained 8,864 firms under 20 years' old, amounting to 56% of the total. But these firms' clout did not match their numbers. They accounted for only 15% of corporate assets, 17% of sales and 13% of profits. About three-quarters of the economy was still in the hands of state firms and old, private firms born before 1985.

In a new paper**, Ashoka Mody of the IMF, Anusha Nath of Boston University and Michael Walton of Harvard echo this finding. Looking at companies listed on the Bombay Stock Exchange, they find that stand-alone, private firms increased their share of sales from 1989 to 2008, largely at the expense of state firms. But state firms hung on to a 37% share and India's big family-owned conglomerates, known as business houses, actually increased theirs (see left-hand chart).

The birth-rate of new firms slowed after the mid-1990s, they find. And in India old firms seem never to die. Only four out of every 10,000 firms go bankrupt, according to the World Bank, compared with 350 in America. The oldest firm in the study by Ms Alfaro and Ms Chari is Howrah Mills Company of Kolkata. Incorporated in the 19th century, it is still spinning yarn in the 21st, despite what its parent company calls the “hurly-burly” of the marketplace. Indian capitalism has seen plenty of entry, but little exit; lots of creation, little destruction; lots of hurly, little burly.

Before liberalisation, many Indian firms enjoyed a quiet life in concentrated industries, where a coterie of licensed firms divided the market between them. We were so used to thinking that we are the best, we are a blue-chip, so the customers would have to pay our price, recalls Sudhir Trehan, managing director of Crompton Greaves, a maker of electrical appliances and power equipment. In the decade after liberalisation, Indian industry lost much of this shelter. In March 2000, for example, Crompton Greaves reported a loss of almost 1.5 billion rupees ($33m).

Between 2002 and 2007, however, the profitability of India's listed firms partially recovered. The distribution of returns also changed, becoming twin-peaked (see right-hand chart) with a fatter tail of firms enjoying returns on their assets of over 20%.

Frogs into princes

Concentration also began to increase again after 2000, at least in some industries, according to Mr Mody, Ms Nath and Mr Walton. Indeed, by their calculations, the majority of Indian firms still operate in industries that would be deemed “concentrated” by the standards of America's antitrust authorities. The severity of competition is not easy to measure, however. The number of firms in an industry tells you nothing about the new rivals that could enter if the incumbents grow complacent. As Joseph Schumpeter pointed out, competition can be a threat, even before it is an actuality. “It disciplines before it attacks. The businessman feels himself to be in a competitive situation even if he is alone in his field.”

Crompton Greaves is an example. Its rivals in the decade after liberalisation were the same European and American multinationals that had long been in the country. But liberalisation allowed these firms to bring their best technologies to India—and the threat of Japanese entry into India obliged them to do so.

Mr Mody, Ms Nath and Mr Walton find that firms that win market share also reap higher profits. Perhaps they exploit their stronger market position to overcharge their customers. But the authors find otherwise. The correlation between improved profitability and increased market share is as true for small companies as for large ones. It holds for free-standing firms as well as business houses. Indeed, even in competitive, crowded industries, gains in market share and profitability go hand-in-hand.

This suggests that both stronger profits and a higher market share are the twin rewards for better performance. Corporate India “looks more like an exemplar of dynamic, competitive capitalism than of concentrated market power and economic entrenchment,” the authors write.

Crompton Greaves again serves as an illustration. After Mr Trehan took charge in 2000, he cut the company's payroll from 10,500 to 5,500 in 18 months, starting with 34 directors, presidents, vice presidents and general managers. Faced with the prospect of going under, “we didn't desert the ship, we found a way to… make it float again,” he says.